Note on Meaning and Types of Share Capital

Please Wait...

Concept of Share Capital

Share capital is the ownership capital of a company raised by the issue of its shares. It is the document that acknowledges the ownership of a company to the limit of the amount contributed. It represents a single unit of share capital reflecting the extent of the interest of shareholders. It is amount invested by the shareholders towards the nominal value of shares.

Source:fenesi.com

A company needs share capital in order to finance its activities. Share capital is composed of capital generated from the funds by issuing shares for cash and also non-cash considerations or kind. The share capital may change as the company issues new shares to generate more money over the course of its lifetime as the business requires more capital for expansion and growth. So, there will be an increment of share capital in a business. Share capital may be of two types: common shares and preference shares. Common shares are the primary stockholders shares in a company who have major voting rights in the company’s decisions. Preference shareholders are the shares of those stockholders who have the main claim of the dividend before common shareholders but they are deprived of major company rights. There are different types of shares capital, which are as follows:

Source: slideplayer.com

Types of Share Capital

Authorized or Registered Capital: Authorized capital can be defined as the maximum number of shares which a company can trade as it is stated in its Articles of Associationor as contracted and decided by voting by the shareholders. Authorized capital is usually not entirely used by the company so as to issue added number of stock in future if the company requires increasing capital rapidly in some urgent cases. Another motive of the company to keep a part of the stock in the treasury is to hold a controlling interest in the company. So, the capital which is mentioned in the Memorandum of Association as the maximum amount of share capital is called authorized capital. It is the maximum amount of capital which a company can raise. For example, if a company is registered with Rs.1,00,00,000 divided into 1,00,000 shares of Rs.100 each, the authorized capital of the company is Rs. 1,00,00,000 (100,000 shares @ Rs.100 each). The authorized capital is also called nominal or registered capital.

Issued Capital: Issued capital can be taken as the part of the authorized capital, which is actually offered to the public for subscription. The number of issued stock is a sub-group of the total authorized or registered shares. Issued capital is the quantity of stock which the BOD (Board of Directors) or stockholders have decided to assign. Generally, a company does not issue the entire authorized shares at a time so that the issued capital is always less than the authorized capital. In the above example, the company may offer to the public 50,000 shares only. In this case, the issued capital of the company is Rs.50,00,000 (50,000 shares @ Rs.100 each).

Subscribed Capital:Subscribed capital can be defined as the part of the issued capital which has been subscribed by investors of the company. When any company issues a certain part of its authorized capital, the investors may subscribe or may not subscribe to all number of its shares. Henc,e we can say that the part of issued capital that has been subscribed by the investors of the company is called subscribed capital for the company. It is the part of the issued capital, which is actually taken up by the investors. For example, if a company issues 50,000 shares @ Rs.100 each and the application for 45,000 shares were received, the subscribed capital is Rs. 45,00,000 (45,000 shares @ Rs.100 each).

Called-up capital:The amount of share capital due on shares is normally collected from the shareholders in installments at different intervals. The called-up capital is that part of the nominal value of shares subscribed by shareholders which are requested by the company for payment. For example, if the subscribed capital is 45,000 shares @ Rs.100 each and the company called only Rs.80 per share, then, the called-up capital is Rs.36,00,000 at the rate of 80 per share on 45,000 shares. The remaining balance of Rs. 9,00,000 at the rate of Rs.20 per share on 45,000 shares is known as uncalled capital. The uncalled capital if retained by the company to be called-up for the payment of creditors on liquidation is treated as reserve capital.

Paid-up Capital: Paid-up capital can be described as the quantity of money that a company receives from its shareholders for the purchase of shares. Paid-up capital is the amount which is generated after the company sells its shares straight to shareholders in the primary market. Whereas in the secondary market, no additional paid-up capital is not generated when there is a transaction of shares as the proceeds of those dealings turn to the selling owners, not the company of issuance. It is the part of the called-up capital which has been actually received from the company’s shareholders. If the called-up capital is 45,000 shares @ Rs.80 each and a shareholder holding 100 shares fails to pay the second installment of Rs.20 per share, the paid-up capital is Rs.35,98,000 shares since Rs.2000 due on 100 shares at Rs.20 per share failed to pay.

Hence, share capital is the document that reflects the interest in the company reflecting the ownership thereof and entitling to receive profit proportionately. So, the different types of share capital are authorized to share capital, issued capital, subscribed capital, called-up capital and paid-up capital.